Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

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Question restated: Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

Option a: I, II and III. This option claims ratio analysis ignores both qualitative and quantitative factors and is historical. The statement that it ignores quantitative factors is incorrect because ratio analysis relies on quantitative financial data (revenues, costs, assets, liabilities, etc.). Therefore, including II makes this option incorrect. Also, while ratio analysis is often considered historical since it uses past financial data, the claim that it ignores qualitative factors is true, but the inclusion of II renders the entire option incorrect due to the false assertion about quantitative factors.

Option b: II, III and IV. This option posits that ratio analysis ignores quantitative factors (false, as explained), is historical (true), and is subject to manipulation (true). Since II is false, this entire option is incorrect due to the presence of a false statement.

Option c: I, III and IV. This option asserts that ratio analysis ignores qualitative factors (true), is historical (true), and is subject to manipulation because financial statements can be manipulated (true). All three statements I, III, and IV are consistent with common limitations of ratio analysis, while excluding II which is not a limitation because ratio analysis uses quantitative data.

Option d: I, II and IV. This option claims ratio analysis ignores qualitative factors (true) and ignores quantitative factors (false for the same reason as in option a), and is subject to manipulation (true). The inclusion of II makes this option incorrect because it asserts a false limitation about ignoring quantitative data.

In summary, evaluating each statement: I is a valid limitation since qualitative aspects (like management quality, market conditions, brand value) are not captured directly by ratios. II is not a limitation since ratio analysis relies on quantitative financial data, so claiming it ignores quantitative factors is inaccurate. III is a valid limitation because ratios are computed from historical financial statements and reflect past performance. IV is a real concern since financial statement manipulation can distort ratios. Therefore, the combination I, III and IV (option c) correctly captures the true limitations of ratio analysis, while the other options include at least one incorrect assertion.

MCD2150 Accounting for Managers - Trimester 2 - 2025

Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

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Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and therefore so are the ratios based on them.

Which of the following are limitations of ratio analysis? I. Ratio analysis ignores qualitative factors II. Ratio analysis ignores quantitative factors III. Ratio analysis is historical analysis. IV. Financial statements are subject to manipulation and so are the ratios based on them.

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